IR35 was introduced in April 2000.  It broadly means that when a worker is engaged through an Intermediary under terms and conditions which are indicative of employment, PAYE and NIC apply to payments received from that contract.  Determining employment status is a complex area with slightly different rules for tax, national insurance and employment rights.

What do you need to know?

For all Public Sector and many private businesses, the responsibility for deciding whether these rules apply has shifted from the worker’s business to the end user.  This is subject to exemptions for contracted out services and certain small businesses.  The responsibility for accounting for tax and national insurance also transfers from the worker’s intermediary to the “fee-payer”.  If the correct procedures are not followed, the liability for any underpaid tax and national insurance, plus interest and penalties can transfer up the supply chain.

In practice, this means that there should only be a marginal impact on workers' businesses that are complying.  However, for those businesses that have not been complying, there can be a significant impact on net pay.  Who bears the additional costs will depend upon supply and demand.

Who is affected?

• All medium and large businesses who use contractors, sub-contractors, freelancers, employment business or labour agencies.

• Any employment businesses or labour agencies who supply workers engaged through limited companies to end user clients.

• Any workers who provide their services to the Public Sector or medium and large private businesses.

• Any advisers who work with any of the above businesses.

What do you need to do?

• Identify whether there are intermediaries in your supply chain, which may not be immediately obvious.

• Understand who the end-hirer is and who the fee-payer is and identify whether there are any overseas businesses in the supply chain.

• Communicate with all the parties affected including providing necessary training and updating software.

• Issue or review status determination statements.

• Monitor working practices and update Status Determination Statements as necessary.

• Update contracts regularly to ensure that they reflect current working practices.

What if a worker is engaged direct?

If there is no intermediary then the person engaging with the individual supplying the services needs to determine if they are employed or self-employed. If you determine an individual is self-employed and HMRC disagree, your business will be responsible for any underpaid PAYE and NIC. It is frequently possible to reduce these liabilities and the correct commercial indemnities in contracts are important.

Additional Risks for Recruitment Businesses

If a recruitment business is involved in the supply chain there is the additional hurdle of the supervision, direction or control test. There is also the danger that the business owner can be personally liable for any underpaid PAYE and NIC. These businesses are also required to make quarterly submissions to HMRC of all individuals who are not on their own payroll.

Many end users are now pushing for individuals to be engaged directly, transferring the tax risks from them to the employment business. This is particularly prevalent in the construction sector.

Employment businesses are also being caught out when engaging individuals through umbrellas. They are engaging on the basis that the individual is an employee on PAYE. However, some umbrellas are either offering contracts for service and not employment contracts, or are engaging on a gross payment basis either direct or through the individual's company.

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